Airlines

Flying blind

How to exploit the airlines' current troubles to reshape the entire industry

CALL it the bin Laden excuse. Lots of companies are blaming all their troubles on the events of September 11th. But for the industry most directly affected, the airlines, the bin Laden excuse risks turning into a reason to justify unwise bail-outs and postponement of much-needed restructuring.

The world's airlines are in far worse shape now than they were even during the Gulf war in 1990-91. Before September 11th, they were expected to lose around $3 billion this year. Now they are staring at losses of $10 billion or more. Job cuts in the industry may soon reach 200,000, almost 12% of the airlines' pre-attack workforce. Just as in the Gulf war, the understandable response of most governments has been to step in with subsidies to keep the airlines flying. The American government has offered $5 billion in cash and a further $10 billion in loan guarantees (although, since the government has taken powers to get equity stakes in exchange, not all airlines will be keen to fall back on these).

This week the European Commission took a rather tougher position than the Americans. It says it will permit state aid only to compensate airlines for business lost in the four days after September 11th, to offset higher security costs or to underwrite extra insurance costs, although it is also relaxing the rule that airlines should lose any take-off slots that they stop using. But the Belgian government has already followed the Swiss in coming up with emergency support for its bankrupt flag-carrier, Sabena, and the Irish and several others may soon follow. Such subsidies may be challenged in court, thanks partly to complaints from other airlines. But the chances of the commission being politically forceful enough to make its hard line stick look quite small.

That is a great pity, for on both sides of the Atlantic the industry needs intensified competition far more than it needs extra subsidy. Above all, it needs governments to pull back from their habitual meddling rather than to increase it. The high capital costs and low profitability that plague most established airlines are a holdover from a bygone era of heavy government regulation, state ownership and lousy industrial relations. To cite only one of the more egregious cases, the strike-ridden, high-cost Sabena has made a profit only twice in its 75-year history. An industry that was, at least until the blip of September 11th, growing by 5% a year, needs to shed all such past baggage if it is to prosper.

Going for broke

The right way forward would start by letting more airlines go under. Rather than dole out indiscriminate subsidies that benefit mainly shareholders and already well-paid staff, it would have been better to push most American airlines into chapter 11 bankruptcy. That would have given a breathing-space in which to sort out how many ought to survive, and in what form. In Europe too, the worst flag-carriers, such as Sabena and Aer Lingus, should now be allowed to go bust or be taken over rather than being kept alive on artificial support.

The next step should be to dismantle the network of regulations that have for too long stood in the way of change in the industry. America should open up its market to foreign competition, dumping restrictions on foreign ownership of domestic airlines and allowing foreign airlines to compete internally. The Europeans should jettison their web of national bilateral treaties with America and negotiate a genuine open-skies deal, at EU level. That would allow Air France, for instance, to fly to America from London or British Airways to do the same from Paris. Cross-border mergers should be permitted and even encouraged. And instead of suspending the use-it-or-lose-it rule for take-off slots, they should be auctioned to the highest bidders, which will probably be low-cost airlines.

Indeed, the rapid and profitable expansion of low-cost airlines, offering basic point-to-point service, has shown wonderfully well what can be achieved with a business model that delivers what customers actually want. Ryanair now has a higher market capitalisation than British Airways. Instead of coddling inefficient incumbents through this difficult period, the world's governments need to expose them to fiercer competition. The winners would be the flying public.